Mercer Human Resources Consulting has challenged the government to clarify details of its Pensions Bill that is already affecting restructuring plans of companies.
Matthew Demwell, European partner at Mercer, told IPE, said the effect of the legislation’s more penal aspects would be to tie British industry up in red tape and prevent it engaging in mergers and acquisitions activity and corporate restructuring.
DEmwell’s comments came as WH Smith and Marks & Spencer have highlighted the potential that uncertainties over pensions have to complicate takeover bids. The Smiths Pension Fund told IPE it could effectively block a private equity buy-out of the company unless it was protected from any increase in balance sheet leveraging, while Philip Green is investigating the pension deficit at M&S before deciding whether to bid for the retailer.
Although there have been some high-profile examples of pension fund issues complicating takeover activity, Demwell said that the problem was much more widespread than people have previously realised.
The Bill’s ‘moral hazard’ clauses give powers to the new government–appointed regulator of the Pension Protection Fund (PPF) to prevent companies from shifting their deficits to the PPF, he said.
“We generally agree that the moral hazard clauses are necessary,” Demwell said. “But under the new clauses the regulator could take legal action against poorly capitalised companies whose scheme assets are less than the insurance buyout cost of the benefits, as is generally the case. This could deter some investors and could even pose a threat to the survival of some companies.” Mercer believed these proposed powers would go too far as they are not restricted to deliberate attempts to pass pension deficits to the PPF.
“A worrying aspect is the retrospective character of the legislation,“ he noted, as the Bill could allow the regulator to look back to deals done in June 2003.
"The effect of the uncertainty is to frustrate companies undertaking legitimate restructuring for fear of the new government-appointed regulator foreseen under the bill coming back to them some years down the line if, for example, a spun-off operation is found to put a claim on the Pension Protection Fund.
“The major role of the regulator appears not to ensure that pensioners get their full due but to make sure that there are minimal claims on the PPF,” he added.
“The primary legislation is enabling and very wide reaching but the details will be in regulations that will not be published for months,” Demwell says. “We’re calling on the government to say just what the rules are going to be if they are going backdated. Companies would not have been aware of the bill’s provisions because these clauses only appeared in the bill in February and in April when further clauses were added in committee.”
However, Demwell said he was encouraged by signals from the government that as the bill goes through the House of Lords, the UK parliament's upper chamber, it might be prepared to clarify the situation sooner rather than later.
“Given the retrospective nature of the legislation we’d like the government to go as far as possible in this direction as quickly as possible,” he said.